Introduction
Private credit has become a significant alternative to traditional lending, offering attractive returns to investors and flexible capital solutions to borrowers. However, as the market grows, so does the complexity and risk of these investments. For lenders and investors, one of the most critical, yet often overlooked, aspects of private credit are the governance framework of borrowers.
A robust governance framework not only safeguards the lender’s interests but also enhances the borrower’s credibility, paving the way for a successful partnership. Here’s why governance matters and what to look for when evaluating borrowers in private credit deals.
Why Governance Matters in Private Credit
- Transparency and Accountability A solid governance structure ensures transparency in how the borrower operates. For lenders, this means clarity in financial reporting, operational decisions, and compliance with legal and regulatory requirements. Borrowers with strong governance frameworks are more likely to disclose key risks, respond proactively to challenges, and remain accountable to stakeholders.
- Risk Mitigation Governance frameworks provide guardrails that help borrowers navigate risks. Whether it’s internal controls, conflict of interest policies, or independent audits, these measures reduce the likelihood of financial mismanagement, fraud, or operational failures. For lenders, this translates to reduced risk of default and greater confidence in the borrower’s ability to meet repayment obligations.
- Alignment of Interests A well-governed borrower demonstrates a commitment to aligning their interests with those of their stakeholders, including lenders. By establishing clear decision-making processes and oversight mechanisms, borrowers can ensure that their actions reflect the long-term health of the business rather than short-term gains.
What to Look For in Borrowers’ Governance Frameworks
- Clear Organisational Structure Borrowers should have a defined organisational structure with roles and responsibilities clearly outlined. This clarity ensures that key decisions are made by qualified individuals and reduces the risk of conflicts or inefficiencies.
- Independent Oversight A borrower with an independent board of directors or advisory committee signals a commitment to objectivity and accountability. This oversight can act as a check on management decisions and provide strategic guidance in critical moments.
- Robust Financial Controls Accurate and timely financial reporting is essential in private credit. Borrowers should have well-documented processes for budgeting, forecasting, and monitoring cash flow. Additionally, regular audits—preferably conducted by reputable third parties—add a layer of assurance for lenders.
- Compliance and Ethics Policies Borrowers must demonstrate adherence to applicable laws and ethical standards. This includes anti-corruption measures, conflict of interest policies, and environmental, social, and governance (ESG) initiatives where relevant. These policies not only protect the borrower but also enhance their reputation in the eyes of lenders and other stakeholders.
- Crisis Management and Contingency Planning Governance frameworks should include strategies for managing unexpected challenges, such as market downturns, operational disruptions, or legal disputes. Borrowers with contingency plans are better positioned to weather difficulties and continue meeting their obligations.
How Governance Benefits Borrowers
Borrowers with strong governance frameworks are more likely to attract capital at favourable terms. Lenders often prioritise well-governed entities because they offer a higher level of predictability and stability. Furthermore, a robust governance structure can improve operational efficiency, reduce legal and reputational risks, and foster long-term business growth.
Governance & Our Product & Risk Committee
At Kingsbury & Partners, governance isn’t just an abstract concept—it’s a cornerstone of our risk assessment process. Our Product & Risk Committee plays a pivotal role in evaluating the governance frameworks of borrowers to ensure that our clients’ capital is allocated to credible and well-managed opportunities.
When assessing governance, we go beyond surface-level checks. Our process involves a meticulous review of the borrower’s organisational structure, operational controls, and compliance mechanisms. This includes evaluating the independence and effectiveness of their oversight bodies, the transparency of their financial reporting, and the robustness of their crisis management strategies.
The Product & Risk Committee employs a tailored approach for each borrower, leveraging expertise in private markets to identify potential weaknesses or red flags. We examine not only the current governance practices but also the borrower’s willingness to adapt and improve these frameworks over time. This proactive stance ensures that any governance-related risks are identified and addressed early, safeguarding the interests of our clients.
By prioritising governance in our risk assessments, Kingsbury & Partners empowers our clients to make informed decisions with confidence. Our commitment to high standards ensures that the borrowers we endorse are equipped to meet their obligations, align with stakeholder interests, and thrive in an increasingly complex market environment.
Conclusion
At Kingsbury & Partners, we understand the value of governance in private markets. Our team works closely with clients to identify and assess opportunities that align with our rigorous standards. If you’re looking to explore private credit investments or require guidance in navigating the market, get in touch with us today.
